What happens to people after foreclosure?

This post comes from Marilyn Lewis at MSN Money.

Foreclosure. It's the F-word these days. It carries images of homelessness, shame and ruin. For many people, that's true. But for others, apparently, the effects are not catastrophic.

For example, foreclosure doesn't completely lay waste to a credit score. Certainly, it damages it, but bankruptcy causes more of a drop in FICO scores. Oddly, the lower your score to begin with, the less it is affected. The higher the score, the bigger the impact. But even if you started with a high score -- 780 or above -- you might still make it out of foreclosure hanging on to a FICO score as high as 640. (Estimate your credit score for free.)

Adding to the small trove of information about the effects of foreclosure on people's lives, two researchers from the Federal Reserve recently published some surprising findings.

Researchers Raven Molloy and Hui Shan used "a unique dataset based on the credit reports of a large panel of individuals from 1999 to 2010." Here's their paper: "The Post-Foreclosure Experience of U.S. Households."

Molloy and Shan looked at a small slice of the issue: how a foreclosure affects people's housing afterward. They wrote:

Some of our findings are consistent with common beliefs. Post-foreclosure individuals experience more changes in household composition and are less likely to live in owner-occupied housing. They also tend to move to denser, more urban neighborhoods.

Other findings were surprising, they said. Most unexpected, perhaps, was their discovery that, while foreclosure does force many people to move, most "do not end up in substantially less desirable neighborhoods or more crowded living conditions."

Not out on the street

The image in the popular imagination is that, once foreclosure's begun, the home's occupants are out in the street. And yet:

Only about half of borrowers whose mortgage enters foreclosure have moved even two years later, suggesting that many foreclosures are worked out through refinancing or other means.

"Other means" no doubt also includes the reality that banks right now simply can't process the foreclosures they've initiated. Years later, many people in foreclosure are still in their homes with no idea how much longer they'll stay.

Two million foreclosures are at some stage of the process currently, with "another 2 million waiting in the wings," wrote The New York Times recently. Nationally, the average time to complete a foreclosure is 400 days, reports The Washington Post. New York's average foreclosure takes place in 924 days -- 2½ years. In Dade County, Fla., it takes an average of 738 days.

Shan and Molloy say they were surprised to find that "borrowers who do move after a foreclosure … do not seem to end up in substantially more crowded living conditions or less-desirable neighborhoods."

And here's another common perception -- that many families end up bunching together or moving in with family after foreclosure. It, too, is skewered by the Fed paper:

Only a small fraction of post-foreclosure individuals seem to move in with their parents. In short, we find little evidence that many people end up living in larger households in order to defray living expenses.

It is true that some researchers have been finding household size increasing in the U.S. and they link that to financial stress and the recession. But they have been looking at everyone -- not only households affected by foreclosure.

Skewering more perceptions

Not much research has been done about what happens to people after foreclosure, but links to some of what there is have been gathered here.

Foreclosure is particularly disruptive for children. A kid's world, which centers on school, is turned upside down when the family has to move suddenly.

"Foreclosure and Kids: Does Losing Your Home Mean Losing Your School?" (.pdf file), a paper by the Furman Center for Real Estate & Urban Policy at New York University tries looking into the question.

Unfortunately, the paper is based on data that's several years old. It focuses on New York City, not the entire country, so there's no telling how widely applicable the findings are.

It's an interesting snapshot, though:

• 2% of New York City's public school students were affected by foreclosure in 2006-2007.
• Most (78%) were poor and were participating in subsidized school lunch programs.
• On average, students who moved to new schools after foreclosure went to lower-performing schools. But that was true, too, for most students changing schools in the city that year.

No downward mobility

The Fed paper, by contrast, finds that, when homeowners are forced out, they don't necessarily "move down." And many who move to rental housing appear to rent single-family homes, not apartments in large complexes:

Although foreclosure increases the probability that an individual will move to a multifamily building, most post-foreclosure migrants remain in single-family structures. Moreover, their new neighborhood does not have significantly lower median income, median house value, or median rent than their old neighborhood.

"The evidence suggests that post-foreclosure individuals move to rental units in denser urban areas, but the new neighborhoods do not seem to be much less desirable," the paper says.

Also, most people who do move because they've lost a home to foreclosure end up staying in the same job market, although not necessarily in the same school district, the Fed researchers found.

More on MSN Money:

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• How much house can you afford?
• As rents rise, what's a renter to do?
• Calculator: Should you rent or buy?
• Save yourself from US debt disaster
• Find the best mortgage rates